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decayed further. Pressure and heat converted these materials into coal, oil, and natural
gas. This entire process panned across millions of years. In some places, natural gas
moved into large cracks and spaces between layers of overlying rocks, while in other
places natural gas just settled on the porous surface of rocks. Natural Gas, in its original
form, is colorless, odorless, and tasteless. Now, practically this can be an issue –
imagine if natural gas leaks and spreads, there is no way one can identify its presence
in the atmosphere, which is a highly hazardous situation. Hence, producer of natural
gas adds a substance called ‘mercaptan’, which gives natural gas a pungent, sulfuric
odor, making it easier to detect in case of a leak.
The search of natural gas is quite similar to the search for crude oil. Geologists identify
land parcels which are likely to contain natural gas. Sometimes, these land parcels are
on the surface of the earth and sometimes this can be offshore, deep inside, on the
ocean floor. Geologists use the seismic surveys to identify the right place to drill in
order to maximize the probability of finding natural gas. If the site seems promising,
then an exploratory well is drilled to investigate further. Further, if the economics favor
then more wells are drilled and the natural gas is extracted from the ground.
India is the 7th largest producer of natural gas in the world, accounting for nearly 2.5%
of the natural gas production in the world. The bulk of the natural gas produced in India
is used towards power generation, industrial fuel, and LPG. A large chunk is also used
in the fertilizer industry as feedstock.
Needless to say, this discussion on Natural Gas – production and application can get
quite vast, but I guess we are good to stop here, considering we are looking at Natural
gas from a short-term trading approach.
We will move ahead to discuss the contract specification.
However, no discussion on Natural gas is complete without talking about the ‘Amarant
Natural Gas gamble’. J
16.2 – Amaranth Natural gas gamble
Amaranth Advisors, established around 2000, was a US-based multi-strategy hedge
fund operating from Greenwich, Connecticut. The fund had its interest in various hedge
fund strategies ranging from convertible bonds, merger arbitrage, leveraged assets,